United Rentals Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Matthew J. Flannery, President and Chief Executive Officer
• Jessica T. Graziano, Executive Vice President and Chief Financial Officer

Analysts

• David Raso, Evercore ISI
• Steven Fisher `, UBS Group AG
• Jerry Revich, The Goldman Sachs Group, Inc.
• Tim Thein, Smith Barney Citigroup
• Ken Newman, KeyBanc Capital Markets
• Rob Wertheimer, Melius Research
• Chad Dillard, Sanford C. Bernstein
• Courtney Yakavonis, Morgan Stanley
• Neil Tyler, Redburn Partners

Presentation

[Operator]

Good morning, and welcome to the United Rentals Investor Conference Call. Please be advised that this call is being recorded. Before we begin, note that the company's press release, comments made on today's call and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently actually results may differ materially from those projected. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's press release. For a more complete description of these and other possible risks, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2020, as well as to subsequent filings with the SEC. You can access these filings on the company's website at www.unitedrentals.com. Please note that United Rentals has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information, or subsequent events circumstances or changes in expectations.

You should also note that the company's press release and today's call include references to non-GAAP terms, such as free cash flow, adjusted EPS, EBITDA and adjusted EBITDA. Please refer to the back of the company's recent investor presentations to see the reconciliation from each non-GAAP financial measure to the most comparable GAAP financial measure. Speaking today for United Rentals is Matt Flannery, President and Chief Executive Officer; and Jessica Graziano, Chief Financial Officer. I will now turn the call over to Mr. Flannery.

Mr. Flannery, you may begin.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, operator and good morning, everyone. Thanks for joining our call. We have plenty of positive news to share this morning. As you saw we delivered a strong quarter with rental revenue and adjusted EBITDA coming in above our expectations supported by solid fleet productivity. Today, we'll get under the hood of our results. You'll see the numbers were driven by a combination of factors both inside and outside the company including a favorable operating environment that continues to improve and a broad-based growth in customer demand. And that's the predominant theme today not just our growth in key metrics like rental revenue where we gained 22% year-over-year, but also the growth we see going forward. We fully expect our momentum from the third quarter to continue through the fourth quarter and into the coming years. That's evident in the latest guidance we provided. And as Jess walks you through the outlook you'll see that the updates are driven by our expectation of higher core rental results this year. Bear in mind that this increase is on top of our July revision, which already accounted for the acquisitions. That tells you we're looking forward to a strong finish to the year. Before I get into operations, I want to spend a few minutes on our culture because the quality of our organization is key to our strategy. Clearly our people are executing well through the busy season. The integration of General Finance is going smoothly and our team members are being supported by our technology.

We also haven't missed the beat on safety. Our company-wide recordable rate remained below one again for the quarter and 11 of our regions worked injury-free in September. Results like this showcase the caliber of our team and the value of our people. The best-in-class workplace culture we've built for more than a decade delivers tangible benefits because we're known as an employer of choice. This is a strong competitive advantage particularly in tight labor markets. We've grown our team by almost 2,000 employees this year including 500 employees over and above our acquired people and our turnover rate has remained in line with pre-COVID levels. The other part of our service of course is fleet and this is something we manage very closely. We just guided to our third step-up in rental capex this year. And each time the increase has been warranted by customer needs. Our customers are optimistic. They're busy and they continue to see more growth ahead and it's our job to be ready for that opportunity. Some of you have asked about the challenges of getting equipment delivered. And it's clearly a tight supply environment, but we've been able to secure additional fleet by leveraging our strong financial footing and our relationships with manufacturers. The increase in our capex is also based on our leading indicators which echo customer sentiment.

Virtually all of the indicators point to strong industry demand which bodes well for fleet productivity. The used equipment market is another one of those positive indicators. In the third quarter pricing in our retail channels was up 7% sequentially and up by double digits year-over-year. Used proceeds were 60% of original costs which is a new high watermark for us. And you may remember back in the second quarter, we talked about our return to growth. In fact, we've been able to leverage the gains we made in the first half of the year to accelerate our growth and that was despite a tougher comp in Q3. Some of that growth came from acquisitions and cold starts, but even with that factored in both segments are running ahead of expectations. In the third quarter, rental revenue on our gen rent segment was up almost 18% year-over-year with all regions showing growth. In addition, all of our Specialty businesses grew by double digits. Our Specialty segment as a whole was up 36% year-over-year with 21% growth in same-store rental revenue. And that's higher than the same-store growth rate we reported in the second quarter. We've also opened 24 specialty locations through September which keeps us on track for the 30 cold starts targeted for the year. When you pivot to our end markets the picture looks similar, broad-based growth across a range of verticals.

On the Industrial side, we saw widespread growth in rental revenue led by double-digit increases from manufacturing, chemical, processing, metals and mining and entertainment. On the Construction side, the gains were just as broad led by non-res construction where we were up 18% year-over-year. Within non-res demand is becoming increasingly diverse. Warehouse and data center work remains strong and we're also starting to see a recovery in verticals that have been sluggish like hospitality and education. The Power vertical continues to be an important one for us with wind and solar projects on the rise across multiple regions. We're also seeing work build across the entire EV supply chain. Plant maintenance is another big driver for us and we're seeing that work start up again after being paused for COVID. And the most encouraging trend is project diversity. It's early days, but we're starting to see a healthy mix of new projects like; casinos, highway work, hospitals, military bases and more. That signals a return to business confidence. As activity picks up, customers have an opportunity to think hard about who they want to do business with and they're placing an increasing value on corporate responsibility. We have a lot of reputational currency here. Good corporate citizenship has been a priority at United Rentals for years and our company has a long track record of working with customers to support their ESG goals. We're proud to be recognized by Newsweek as one of America's most responsible companies for two years running.

Last week we released our new corporate responsibility report online. And you'll find that it gives you some good insights into our progress in key areas like environmental sustainability and workplace inclusion. So in summary, we're in a strong position operational, financially and culturally in a healthy operating environment. Customers have projects lined up stretching well into 2022. The industry remains disciplined and our team is getting equipment out to job sites. Internally, we're focused on controlling costs and expanding our margins as we lean into growth. We're leveraging our scale to deliver a combination of organic growth targeted cold starts and accretive acquisitions all with long-term synergies for value creation. And in the near term we reported quarter after quarter of profitable growth driven by tailwinds that show every indication of enduring. We see a lot of potential for attractive returns and it gets better from here.

With that I'll ask Jess to go over the numbers and then we'll take your questions. Jess over to you.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Thanks Matt and good morning everyone. Our financial performance in the third quarter highlighted better-than-expected rental revenue which was supported by broad year-over-year growth across our end markets. On the cost side, we delivered solid results while activity was at its highest level of the season and we continue to sell used equipment in a robust market. As for the rest of the year we expect seasonal demand will remain strong. And when coupled with the third quarter's results this supports a raise to our guidance for the year in total revenue and adjusted EBITDA. And more on guidance in a few minutes. Let's start now with the results for the third quarter. Rental revenue for the third quarter was $2.28 billion, or an increase of $416 million. That's up just over 22% year-over-year. Within rental revenue, OER increased $325 million, or 20.7%. The biggest driver here was fleet productivity, which was up 13.5%, or $212 million. That's mainly due to stronger fleet absorption on higher volumes. Our average fleet size was up 8.7%, or a $137 million tailwind to revenue. Rounding out the change in OER is the normal inflation impact of 1.5%, which cost us $24 million. Also within rental, ancillary revenues in the quarter were up about $71 million, or 29%, and re-rent was up $20 million.

While our outlook to OEC sold for the full year remains unchanged, we made the decision to slow down the volume of fleet sold in the third quarter as we maintained capacity for rental demand. Used sales for the quarter were $183 million, which was down $16 million, or about 8% from the third quarter last year. The used market continues to be very strong, which supported higher pricing and margin in the third quarter. Adjusted used margin was 50.3% and represents a sequential improvement of 240 basis points and a year-over-year improvement of 610 basis points. Our used proceeds in Q3 recovered 60% of the original cost of the fleet sold. Now compared to the third quarter of last year, that's a 900 basis point improvement from selling fleet that averages over seven years old. Let's move to EBITDA. Adjusted EBITDA for the quarter was just over $1.23 billion, an increase of 14% year-over-year, or $152 million. The dollar change includes a $219 million increase from rental. Now in that OER contributed $200 million. Ancillary was up $17 million and re-rent added $2 million. Used sales helped adjusted EBITDA by $4 million, and other non-rental lines of business provided $8 million.

SG&A was a headwind to adjusted EBITDA of $79 million in part from the reset of bonus expense that we've discussed on our prior earnings call. We also had higher commissions on better revenues and higher T&E, which continues to normalize. Our adjusted EBITDA margin in the quarter was 47.5%, down 190 basis points year-over-year, and flow-through as reported was just over 37%. Impacting margins and flow-through in Q3 are few items worth noting. We mentioned back in July that bonus expense would be a drag for the back half of this year with most of the drag in the third quarter. We also have the impact of General Finance, which we've owned all of the third quarter this year, but of course is not in our comparative results last year. I'll also remind you that we had $20 million of one-time benefits recorded in the third quarter last year that did not repeat. Adjusting for these items, the flow-through was about 58% with margins up 130 basis points year-over-year. This reflects strong underlying performance in the quarter, particularly when you consider the impact from actions we were taking on costs last year, as well as the impact of costs that continue to normalize this year.

I'll shift to adjusted EPS, which was $6.58 for the third quarter. That's up $1.18 versus last year and that's from higher net income. Looking at capex and free cash flow for the quarter, gross rental capex was $1.1 billion. Our proceeds from used equipment sales were $183 million, resulting in net capex in the third quarter of $917 million. That's up $684 million versus the third quarter last year. Now turning to ROIC, which was a healthy 9.5% on a trailing 12-month basis, which is up 30 basis points both sequentially and year-over-year. Notably our ROIC continues to run comfortably above our weighted average cost of capital. Let's turn to free cash flow and the balance sheet. Through September 30, we generated a robust $1.25 billion in free cash flow, which is after considering the sizable increase in capex so far this year. We've utilized that free cash flow to help fund over $1.4 billion in acquisition activity and we reduced net debt almost $100 million. Our balance sheet remains in great shape. Leverage was 2.4 times at the end of the third quarter that's down 10 basis points sequentially and flat versus the end of the third quarter last year even as we funded acquisitions this past year.

Liquidity at the end of the third quarter remained strong at over $2.6 billion. That's made up of ABL capacity of just over $2.2 billion and availability on our AR facility of $68 million. We've also had $320 million in cash. I'll also mention we refinanced $1 billion of five and seven-eighths notes earlier in the quarter and refinancing that debt will save $29 million in cash interest in 2022 and extends our next long-term note maturity out to 2027. As we look out to the end of the year, I'll share some color on our revised 2021 guidance. Given we have a quarter-to-go, we've tightened our full year ranges for total revenue and adjusted EBITDA and importantly, have raised our expectations for both. These updates reflect better-than-expected third quarter results and the continuing momentum we see in demand and in managing our costs for the fourth quarter. We've again raised our outlook for growth capex this year with a $250 million increase at the midpoint. This means we would land more fleet than normal in the fourth quarter and that's supported by our planning for strong growth in 2022. We've left the range on capex a little wider than we would normally at this time of the year as we continue to work with the OEMs to land what we've ordered. And finally, our update to free cash flow reflects the impact of these guidance changes, notably, the additional capex we expect to buy. And even with that increased investment in capex, free cash flow remains strong at over $1.5 billion at the midpoint.

So, now, let's get to your questions. Operator, would you please open the line?

Questions and Answers

[Operator]

Certainly. [Operator Instructions] Our first question comes from the line of David Raso from Evercore ISI. Your question please.

[David Raso, Analyst at Evercore ISI]

Hi, thank you. A bit of an open-ended question, answer as you wish. The incremental margin framework you're thinking about for next year, can you give us some thoughts around that? And then I might follow up with a couple of specifics around that.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Sure David. I'll start -- there's a couple of things I'd say on both sides of the ledger to consider as we get through our planning process for 2022. I'll start on the benefit side. The first would be that we will have a tailwind from the bonus adjustment that we've mentioned the last few quarters. So, you could assume as that bonus resets next year, that's going to be about a $50 million tailwind that will carry into 2022. The other I would say positive as we're considering 2022, particularly, as we're thinking of it as a strong year, is really the benefit that we'll get through revenue right and the volume and the activity that will flow through the topline. On the other side, I would say -- again, we're sharpening our pencil on details for the plan. We are considering the inflation impact not surprisingly, we expect that there'll be some continuing cost inflation, particularly in some of the bigger lines for us as you think about labor and delivery and R&M. So, we're working through those as we work to get our plan pulled together.

We also have additional costs that are going to normalize, right, that will serve as a bit of a headwind. T&E the most obvious example. As we look at what the normal level of activity -- cost activity would be for us in discretionary costs that, again, will continue to normalize. And then the other margin impact I'd say really for the first half of the year would be on lapping the acquisitions, right, and the impact that that will have again through, I would say, the end of the second quarter. So, I hope that's helpful as a framework. I will just broadly also say we do expect that margins will be up in 2022 and we do expect that we'll be back in that normal range of flow-through that we target somewhere between 50% and 60%.

[David Raso, Analyst at Evercore ISI]

To that end, the -- I would assume within fleet productivity right now, it's still time you growing faster than rate. When would you -- which quarter would you expect fleet productivity to be driven more by rate than you?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

So as you know David we...

[David Raso, Analyst at Evercore ISI]

The first quarter just a sense of because I would think when it's driven by rate more than you that could be a positive for the incrementals on the margins?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes, certainly David. Without getting into the as you know with the details of the individual components, your idea of understanding, we came into 2021 same absorption was by far our greatest opportunity coming off that baseline in 2020. We'll have a little bit of that baseline tailwind in Q1 but after that it will be gone. And I will just tell you without getting into the specific quantification, certainly absorption was at a real high level this year. And if we were able to replicate this level of next year, we'd be really pleased. But we're not going to get into the details and cherry pick this because it's a good story. And I think the discipline in the industry and the way that we've talked about and categorize the supply-demand environment, we do agree that at some point next year this will be positive derived fleet productivity maybe on some of the other factors even more so. So we're looking forward to that. I don't think we'll see these big double-digit numbers again because we had such an absorption tailwind but we certainly can exceed our inflationary factors that we target at 1.5%. So we feel good about that opportunity next year.

[David Raso, Analyst at Evercore ISI]

And Matt, one quick question about the end of year. It looks like the net debt to EBITDA should end maybe below 2.2%. We haven't been there in a long time. Just I mean I think since 2007 to be exact when I mean you're digesting Gen Finance but obviously given the frequency you've done deals before in batches, how should we think about the M&A landscape versus alternative uses for that balance sheet strength?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes. So as you guys know and Jess talks about it all the time, first and foremost, we'll use that robust free cash flow and that strong balance sheet to support the growth of the business. You could see we've leaned in organically this year and M&A. And I think we can do both in the future but we don't necessarily target an M&A number because it has to go through our process. The pipeline is still there. We think consolidation is still an opportunity in the industry. And so stay tuned. It's really more about what makes it through the end of the pipeline and making sure that it meets our criteria strategically, culturally and most importantly, financially. So we certainly have the dry powder. We want to use it for growth first but we're going to only do smart deals. And if that doesn't come through then Jess has the pleasure of dealing with capital allocations in a different way, once we get leverage down to the bottom of our rate.

[David Raso, Analyst at Evercore ISI]

All right. Thank you for the time.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Thanks, Dave.

[Operator]

Thank you. Our next question comes from the line of Steven Fisher from UBS. Your question, please.

[Steven Fisher `, Analyst at UBS Group]

Thanks, good morning. You talked about the Q4 extra capex investment with an eye to 2022. But where do you stand on the fleet ordering for the 2022 deliveries? Are things happening earlier those discussions that you generally have? Are they happening earlier than they typically do? And what kind of inflation do you think there could be next year on that?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes, Steve, we actually did start earlier this year. I think the OEMs did I think everybody was want to make sure they got ahead of the ball game. So a little bit earlier but we're usually early anyway. So that wasn't too big an adjustment. I would say that when we think about next year I think our OEMs are working our partners are working real hard to continue to get that supply chain as smooth as they can. It's good for their business and for us. But this year as you saw we were able to raise capex and it was probably as tight a market as you can. So we have plenty of channels to get through in some products. Maybe we went to our second level, second tier suppliers but still good products that our customers accept. So opening up those channels actually will probably help us next year. And we feel really good about where we are with the ability to get the fleet will need to support customer demand. And if you want to call letting this natural flow of orders that kind of a little bit delayed this year coming through in Q4 as a hedge, that would be a fair way to look at a low insurance policy. But most importantly, we're doing it because we feel very good about the demand that's going to be there.

[Steven Fisher `, Analyst at UBS Group]

We've heard from others like low single-digit inflation. Is that kind of the ballpark of what you're thinking as well?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes. I don't like to share negotiations online but to try to be helpful, we usually tell you that 1% to 2% range, it's probably going to be a tick over that when we're all done. It will depend on what comes in and what vendors end up supporting more growth. But it's fair to say we'll be a little bit higher than that normal 1% to 2%.

[Steven Fisher `, Analyst at UBS Group]

Okay. And then as you see this cycle taking shape, what parts of the specialty business do you see offering the most upside for growth here?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

It's as boring as it sounds. It's really pretty broad across the board. I would say our fluid business specifically tank business maybe has a little more room to absorb. But outside of that everybody's -- including fluid have been growing by double digits as I said. And even our most mature specialty businesses are still growing strong. So we've talked about having a lot of headroom that 21% same-store growth that's embedded within that 36% total growth, I think shows that we still have a lot of runway in our specialty business both from organic growth and as we showed this year accretive M&A.

[Steven Fisher `, Analyst at UBS Group]

Perfect. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your question please.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Yes. Hi, good morning everyone. Can you talk about the opportunity for you folks on zero-emission products? What's the demand along your customer base? And what are the challenges of servicing that type of equipment compared to conventional products? Are you able to get the rate that's needed to get the higher pricing point in a lot of that equipment class? Can you just flesh out what the implications are for your business as that part of your fleet grows?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure Jerry. Yeah, and I think you touched on something about the rate, which is important and we do segregate some of these really new innovative products that are electrified with historically combustible engine. But when you think about our fleet already as it is today over 20% of our fleet is electrified. And we think that will grow. I think the OEMs are doing a good job thinking about how they can continue to participate and assist because at the end of the day it's really them they are going to drive it. And once they build that scale, it will be even accepted even broader in the market once we get the economics of scale in line. With all that being said, we are piloting products right now. We've been really dealing with this as you saw we went to Tier three and Tier four and in some markets that it was faster than others. So we've been on the forefront of this. And I -- really I am pleased with the participation of the OEMs to help drive it forward. It's not a sea change yet but you really feel it building.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Okay, terrific. And then on the mobile storage business I think you folks had highlighted plans to double OEC in that business over five years or so. Given the supply chain constraints, how much can you grow OEC in that business in the near-term?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah. I would say we feel even better about how we set our goals when we acquired the business now that we have the team on board. And I think we'd even be ahead of where we are today if there wasn't some supply chain issues. So certainly container storage containers specifically are real tight. We all see that every day. But the good news is that the customer desire and the ability for us to cross-sell is showing really strong early and looking forward to -- we're staying on track to that double in the business for five years. We feel very good about that.

[Jerry Revich, Analyst at The Goldman Sachs Group]

Okay. Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you Jerry.

[Operator]

Thank you. Our next question comes from the line of Tim Thein from Citigroup. Your question please.

[Tim Thein, Analyst at Smith Barney Citigroup]

Thank you. Matt maybe just to continue along that on GFN. Maybe it's too early, but can you just update us in terms of your thoughts around the synergy potential and the timing for those as it relates to that acquisition?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah. So just to remind you, the real synergy here is customer support adding to our full value prop right that one-stop shop go-to-market strategy and not cost synergies. Where we are picking up productivity and helping the team is as they adopt our tools, we're seeing better productivity opportunity. The most important synergy is the growth synergy you're having access to our 2,000-plus sales force. So that's what we're focused on and not our typical cost synergies so to speak.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Yeah. I'll just close the loop on that to Matt's point; cost synergies were not big in this deal. They -- we had talked about $17 million over a three-year period, we feel pretty good about getting those realized in a shorter time. So probably a couple of years in and will be fully realized. But again not anything super material for this deal the growth is the opportunity.

[Tim Thein, Analyst at Smith Barney Citigroup]

Got it, okay. And then Matt I just wanted to circle back to your comment earlier on your non-res revenues up, I think you said 18%. If you look at the last spending data from the Census Bureau, I think it showed non-res spending down like a couple percent. And this trend of rental revenues outgrowing construction is hardly new, but that number did stand out to me. And so I'm just curious, maybe any finer points there? I'm sure, there's, all kinds of noise data in a single quarter, but can you maybe just talk through what you're seeing within that obviously important vertical for URI? Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah. If anything I would characterize it, as I did in my remarks as very broad. The areas that were the first to really pickup speed right, like, data centers technology overall, health care, logistics, specifically distribution, warehousing remains strong and the areas that were lagging are picking up, even some that were really dead as a door, now like logic. So we're seeing this -- we're seeing activity currently and forecasted that in our view with our ears on the street and our customer sentiment, doesn't necessarily guide with that non-res going down.

[Tim Thein, Analyst at Smith Barney Citigroup]

Very good. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks, Tim.

[Operator]

Thank you. Our next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your question please?

[Ken Newman, Analyst at KeyBanc Capital Markets]

Hey, good morning guys.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Good morning.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Hi Ken.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Hi. I have a bit of a bigger picture question for you, really just in terms of -- given where the supply chain or raw material costs are today, obviously, I expect the OEMs to drive some pretty significant price increases across the smaller customers your smaller competitors versus where you locked in prices. So, if the OEMs want to push call it double-digit pricing or even more on the smaller competitors, one, do you think the smaller players can handle that? And two, how do you think about the opportunities or the dynamics of the industry going forward?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

I think -- listen, I never will especially coming from this business and was one of those smaller with one of the smaller OEM -- I mean, independent years ago. I wouldn't negate the ability of people to flex and adjust their business. You've got a good business. And you know how to adjust people run their business appropriately. And part of that includes driving the right fleet productivity, making sure you're getting paid for your services, most importantly, giving good service. So, I think everybody will find their place. I do think the bigs, will continue to get bigger. I think there is opportunity of scale that supports consolidation, from a competitiveness perspective, but there's still a very broad range of business out there. So I don't necessarily feel -- I don't think we're going to see people taking pain that they can't absorb. And its one year still costs for remedy, some of these costs will go back down. So I think the supply/demand discipline will remain. And I think that your comments support that. I wouldn't go the next step further. It doesn't thin out the herd, so to speak. I'm not really seeing that right now.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Got it. That's helpful. And then, just real quickly, my follow-up is really on the M&A pipeline. Obviously, you're still digesting General Finance, but I am curious just how the activity of the pipeline is looking? And are there deals out there in the space that still look attractive in this type of tight supply chain environment?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Well, I call attractive in the eyes of the beholder, right? We've got a pretty high bar. But I do think there will be M&A activity in the industry, right? And I think you've heard that from -- and seeing that from our peers. And we think that's a good thing. As I'll say, again, we think the big is getting bigger is good. As far as the pipeline, it's pretty broad across the board, from two store mom and pops to everything above. So it's really an organic kind of moving issue that we just -- we always work the pipeline. We even worked the pipeline during COVID, quite frankly. It's just a matter of what that stuff getting through on the other side Ken. So I -- if I try to forecast it for you, I don't know how right I could be anyway, other than that we're going to work the pipeline. And we're going to only close accretive deals.

[Ken Newman, Analyst at KeyBanc Capital Markets]

Very good. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, Ken.

[Operator]

Thank you. Our next question comes from the line of Rob Wertheimer from Melius Research. Your question please?

[Rob Wertheimer, Analyst at Melius Research]

Hi. Thanks and good morning everybody.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Hey, Rob.

[Rob Wertheimer, Analyst at Melius Research]

Matt, maybe I've asked you this question before. And stop me if it's unfair. But it feels like you've done such a strong job on acquisitions over the past many years. And that there's maybe a little bit less relative opportunity in acquisition going forward. And I guess the question is, do you see growth being tilted more organic over the next three to five years than it was? And then, is the organization sort of structured to do that? I don't know if you've got ample space on a lot to put more fleet in. I don't know if competitively the mix works well to put more fleet in different areas. I just wonder if you can give a big picture overview on your thoughts on longer-term growth. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure. And I don't want to pat ourselves on the back, but thanks for the recognition. That's why we're always working in the pipeline, because we agree that's the skill set of integration that we've really worked hard at over the last 10 years and you can go all the way back to the roll-up in 1998. But it can't be the only way you grow. You always have to be prepared for organic growth. And how that balance comes through to me is more of an output of how you implement your strategy versus the strategy, right? We have a growth imperative. And the part that we can control is making sure we build a mechanism for organic growth. That's why we focus so much on cross-selling and our value prop. Whether those products are new introductions, because we bought them through an acquisition, or whether we acquire them from an OEM, we still have the same mindset of one-stop shop, full-value prop to the customer is going to support growth. And we view the difference between organic and acquired as an execution point, not necessarily the strategy.

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Rob, if I could add one thing to that and that would be, we won't just consider where we are today and let that become an impediment to the kind of growth that we think we can have from an organic perspective. So, for example, as we're looking at what our long-term strategy and the type of organic growth that we can support, we're going to make sure that the facilities and all of the other, let's call it, behind-the-scenes support to build capacity around that opportunity is also part of the decision-making that goes into the underlying strategy for growth. So it all goes together for us to make sure that, as we're working towards that growth, we can absolutely service the customer and fill the capacity appropriately.

[Rob Wertheimer, Analyst at Melius Research]

Okay. And so, not to put words in your mouth, Matt. But, as you look out -- I know you guys do the three and five-year looks, you don't see any bending of the curve or any absence of growth opportunities you can still put capital out there for the foreseeable future? And I will stop. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yeah. No, you characterized it right and then the -- by those skilled execution will come as those opportunities present themselves and are measured against each other. And I will say I do believe that will continue. And we usually have after any kind of disruption continued penetration of rental. So there's still opportunities for the overall market to grow.

[Rob Wertheimer, Analyst at Melius Research]

Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Chad Dillard from Bernstein. Your question, please.

[Chad Dillard, Analyst at Sanford C. Bernstein]

Hi. Good morning, guys.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Good morning.

[Chad Dillard, Analyst at Sanford C. Bernstein]

I was hoping you guys could share just any early thoughts on how you're approaching or how you're thinking about approaching the used equipment sales as we go into next year, just given that there is a pretty robust equipment shortage? What appetite do you have to -- I guess, do you have the appetite to sell as much as you have this year?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes, Chad, we did pull back a little bit here in Q3, but that was more because the fleet was on rent. As I said earlier, we ran real hot this year in fleet on rent. So that would be the only reason to. We spent a lot of time and energy building this pipeline of retail sales. And you'd really have to twist my arm to get us to slow that down. It's a great way to refresh our fleet and support customer demand. So we're going to continue to do that. I don't see us changing our mindset on that. And as our fleet team proved this year in probably the tightest environment, we still can source new equipment to us to replace that fleet that's getting towards its end of its rental useful life. All that being said, in a situation that we just had -- with COVID, we still leave that headroom in our fleet age to make sure that we can react, if we do have to cut capital spend and keep fleet a little bit longer. But I don't think you want to use that headroom too early. You always want to keep it there for a rainy day. So those balances are all the reasons why we're going to keep the used sales machine running.

[Chad Dillard, Analyst at Sanford C. Bernstein]

Got it. Okay. And then, just the incremental capex increase. Can you just split out how much is general versus specialty? And then secondly, I guess, talked about your power business being strong. I guess what percentage is that fully renewable? And can you just give some color on just the level of visibility you have in that vertical, let's say, like over the next eight, 12 months?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Yes. So first part of the question, capex spend has been very broad. You can imagine this last quarter of, let's call it, an unusually high Q4 is mostly the stuff that has supply chain, delays during the year and we just decided to let those POs flow, because we know they're high-demand assets. As far as I think you were asking about the power vertical, I couldn't hear you too well. But as far as I'm sorry go ahead.

[Chad Dillard, Analyst at Sanford C. Bernstein]

No, you're right.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Okay. So as far as, our Power business which is one of our mature specialty businesses as a product, but also as an end-market vertical, there continues to be growth opportunity. So therefore, if we're growing the fastest by definition, they're getting an ordinate amount of their spend to capex versus the size of their business, and that's continued to move forward. They've done a good job planning and sourcing as well, and supporting the demand that's out there that certainly has spurred a very strong growth for that team. So we're encouraged by what the not just what they see ahead, but the credibility and the opportunities that they see in the past 12 months.

[Chad Dillard, Analyst at Sanford C. Bernstein]

Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, Chad.

[Operator]

Your next question comes from the line of Courtney Yakavonis from Morgan Stanley. Your question, please.

[Courtney Yakavonis, Analyst at Morgan Stanley]

Hi. Thanks, guys. Maybe if you can just talk, I know you've switched to talking about fleet productivity, but just in general terms, it seems like the recovery thus far has been largely utilization driven? And if you can just comment at all on, how you think, if it should still be utilization driven in 2022? Or are we entering an environment where you might be able to take more pricing than you historically have given how tight it is right now?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Courtney, I would just say that, the fleet productivity driven by absorption was really more about the baseline, right? So we were just we had so much extra capacity coming out of COVID that the first, it was the obvious mathematically greatest opportunity. But the dynamics for driving all parts of fleet productivity to positive were there this year. It was just math. That's why you may be skewed towards one or the other. And I think that, that will remedy next year and the balance will be a little bit different. One of the reasons why we talk about it in a consolidated way is because it's an interplay of the three factors that really matter. And I think to categorize, there may be a shift from absorption to other opportunities next year is an appropriate way to look at.

[Courtney Yakavonis, Analyst at Morgan Stanley]

Okay. Great. Thanks. And then if you could also just comment on the Trench and Specialty business margins or gross margins over 50% this quarter, and obviously doesn't even have the full impact of GFN synergies. And if you can just help us think about what the longer-term margin potential for that business could be over time?

[Jessica T. Graziano, Executive Vice President and Chief Financial Officer at United Rentals]

Hey, Courtney, it's Jess. Yeah, I mean, we think the margin potential can really for the whole business, but for Specialty included would be that it could get better over time, right, as the business grows and we continue to have better opportunities to absorb fixed costs. And to continue specifically for Specialty to grow that business into the white space that we know, we're filling with the kind of cold start activity that we do every year. And so we're encouraged and very pleased with not only the growth that they've had, but what we see continuing going forward. And that includes General Finance as well. I mean, obviously that business from a margin perspective is going to be dilutive to the base. But great, great business from a return perspective and again the growth opportunity there is really, really great for us.

[Courtney Yakavonis, Analyst at Morgan Stanley]

Thanks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thanks, Courtney.

[Operator]

Thank you. And our final question comes from the line of Neil Tyler from Redburn. Your question, please.

[Neil Tyler, Analyst at Redburn Partners]

Hey, good morning. Thank you. A couple left from me, please. Firstly, Matt in your prepared remarks you talked about a number of lead indicators, all indicating sort of positive demand potential for the foreseeable future. But for those of us with, I guess a bit less experience in this industry than yourself, I wonder, if you could I could ask you to call on that experience? And say, I mean, what's obviously an exceptionally strong environment at the moment, is there anything in those lead indicators that suggest that this cycle might be stronger but shorter, because it is clearly exceptionally strong right now? That's the first question. And then the second one is calling back to Jess's comments on the margin framework for next year. And I understand that, you don't talk specifically about rate. But a couple of your competitors have indicated that rate increases year-on-year in the region of 2.5% to 3% would be sufficient to offset the cost inflation that they see in their SG&A base. Would you be prepared to sort of I guess confirm or deny whether you agree with that statement?

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Sure, Neil. So I'll take the latter first because it's pretty simple for me. We are not going to cherrypick talking about the individual components when it's in our benefit. So -- but I think that the tone of a positive environment to drive better returns through fleet productivity is the right tone. And I'm pleased to hear how our peers are talking about it. And the industry overall how it's responding. So everybody's got their own inflationary pressures and the way they're going to work through it. But I also think it's not just tied to what your cost base is it's what's the value you're bringing and what's the mix of products and services you're offering. So that one is an easy answer me. As far as the leading indicators I mean you guys all can see everything we can see except for a couple of different things. Our customer confidence index remains very strong. We have over 60% of our customers feel next year is going to be better and only 3% think that there is a potential for them to be down year-over-year. So that's a real strong sentiment. And then the feedback from the people that we have in the field whether it's the sales team, the national account team and the managers that stay very close to the business and the pipeline we talk about we have anywhere from seven months to 12 months' visibility. And certainly recently we've been on the shorter end of that coming out of the disruption of the cycle. That hasn't changed. So I don't think we are any better than anybody else in forecasting how long the cycle is but there are no signs that say that it's going to be a short cycle.

Quite contrary one of the things I'd say that could lengthen it is we're not even factoring in infrastructure bill and funding which we think will be a great opportunity for us. And if they approved it today it wouldn't manifest in 2022. It'd be something that we get 2023 and beyond. So that would be another pickup to the cycle. So I'm not seeing anything that would denote a shorter than normal cycle. Admittedly, we don't have that any more visibility anybody else into that long-term cycle. The good news is we have a business model that doesn't require it. As we've shown over the past two years we can adjust very quickly and adjust to the opportunities or not that are there for us.

[Neil Tyler, Analyst at Redburn Partners]

Thank you very much. That's very, very helpful. Thank you.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Flannery for any further remarks.

[Matthew J. Flannery, President and Chief Executive Officer at United Rentals]

Thank you, operator and that wraps it up for today everyone. And I want to thank everyone for joining us. I want to remind you that we have two presentations to look at. When you have the opportunity our third quarter investor deck as always but in addition I mentioned our ninth annual corporate responsibility report both are linked to our website and are there for your perusal. So I appreciate the time today. And as always Ted is available to take your calls. So with that operator please end the call.

[Operator]

[Operator Closing Remarks]